The dollar is broadly weaker ahead of the jobs report. DXY is trading lower near 99.770 after three straight up days. USD/JPY is trading lower near 144.70 as Kato acknowledged the possibility of using Japan’s UST holdings as a bargaining chip in trade talks (see below). Elsewhere, the euro is trading higher near $1.1330 after April CPI data ran hot (see below), while sterling is trading modestly higher near $1.3290. We are looking through the tariff noise and continue to believe that much of the recent dollar weakness is due to a growing loss of confidence in U.S. policymakers as well as the negative impact of tariff uncertainty on the U.S. economy. We view any relief rallies with skepticism, with this week’s gains unlikely to be sustained no matter how the U.S. data come in. In that regard, the data so far this week have been softer than expected and are showing some of the initial negative tariff impact. This softness is likely to continue with today’s jobs report.
AMERICAS
Trade tensions appear to be easing. China ‘s Commerce Ministry noted that “The U.S. has recently sent messages to China through relevant parties, hoping to start talks with China. China is currently evaluating this.” Elsewhere, Japan’s chief trade negotiator said the US and Japan are “able to move forward in frank and constructive discussions to reach a mutually beneficial agreement as soon as possible.” Finally, the EU’s Trade Commissioner said the bloc is making “certain progress” towards striking a trade deal with the U.S. That said, talk is cheap and we suspect there remain many hurdles to inking significant trade deals in the narrow 90-day window.
Jobs report will be the highlight. Bloomberg consensus for April NFP is 138k vs. 228k actual in March, while its whisper number stands at 120k. Unemployment is expected to remain steady at 4.2%, while average hourly earnings are expected to pick up a tick to 3.9% y/y. ADP, JOLTS, and weekly claims (see below) are all showing softness in the labor market and so we see downside risks to today’s NFP.
Weekly jobless claims suggest weakness in the labor market is picking up. Initial claims came in at 241k vs. 223k expected and a revised 223k (was 222k) previously and was the highest since mid-February. Elsewhere, continuing claims came in at 1.916 mln vs. 1.865 mln expected and a revised 1.833 mln (was 1.841 mln) previously and was the highest since November 2021. We think the cracks in the labor market are finally showing up, and raises the odds that we get a downside surprise in NFP today.
The Q2 growth outlook is mixed. The Atlanta Fed GDPNow model now has Q2 growth at 1.1% SAAR vs. the initial estimate of 2.4%. It will be updated next Tuesday after the data. Elsewhere, the New York Fed Nowcast model has Q2 at 2.7% SAAR and will be updated today. Its initial Q3 estimate will come at the end of May. For those keeping score at home, the gold-adjusted Atlanta Fed GDP model’s Q1 estimate of -1.5% SAAR was the closest to the actual initial reading of -0.3%, and that gold-adjusted model is now the standard one.
April ISM manufacturing PMI softened modestly. Headline came in at 48.7 vs. 47.9 expected and 49.0 in March. However, the details were much weaker as production fell to 44.0 vs. 48.3 in March. New orders came in at 47.2 and employment came in at 46.5, both up from March but still well in contractionary territory. Lastly, prices paid came in at 69.8 vs. 73.0 expected and 69.4 in March and was the highest since June 2022. ISM services PMI will be reported Monday, with headline expected at 50.2 vs. 50.8 in March.
Fed easing expectations have picked up due to the softer data. Odds of a May cut are around 10%, rising to around 60% in June and fully priced in for July. With the 90-day pause in reciprocal tariffs set to end in early July, even that month seems too soon for a cut given the ongoing uncertainty regarding the tariff impact. Looking ahead, the swaps market is pricing in 125 bp of total easing over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
Eurozone April CPI data ran a little hot. Headline inflation came in a tick higher than expected at 2.2% y/y and was steady from March, while core inflation came in two ticks higher than expected at 2.7% vs. 2.4% in March. Services inflation picked up to 3.9% y/y vs. 3.5% in March and is the highest since January. This may keep the ECB on a more cautious easing path. The market has fully priced in a 25 bp cut at the next meeting June 5. Looking ahead, the swaps market is pricing in 50-75 bp of total easing over the next 12 months vs. 75 bp at the start of this week and 100 bp in mid-April.
Eurozone reported final manufacturing PMIs. Headline improved to 49.0 vs. 48.7 preliminary and 48.6 in March. Looking at the country breakdown, Germany improved four ticks from the preliminary to 48.4, while France improved half a point from the preliminary to 48.7. Italy and Spain reported for the first time. Italy came in at 47.0 vs. 46.6 in March, while Spain came in at 48.1 vs. 50.1 expected and 49.5 in March. Eurozone reports final services and composite PMIs next Tuesday.
ASIA
Finance Minister Kato said Japan’s U.S. Treasury holdings are a potential tool in ongoing trade talks. With regards to potentially selling some of its holdings, Kato said “It does exist as a card. Whether or not we use that card is a different decision.” This sort of threat is always a double-edged sword. Japan is the single largest holder of USTs at $1.126 trln. China is second with $784 bln. Threatening to dump an asset of which it is a major holder means that Japan can hurt itself in the process. As far as we can recall, China has never played that card before and so we’re a bit surprised that Japan is acknowledging it. To us, the key takeaway is that Japan is not going to roll over easily to U.S. demands and is starting to push back in a variety of ways.
Japan reported mixed March labor market data. The unemployment rate rose a tick to 2.5% vs. expectations of remaining steady at 2.4%, while the job-to-applicant ratio rose a tick higher than expected to 1.26 vs. 1.24 in February. Despite a relatively tight labor market, wage pressures appear to be easing. March cash earnings data will be reported next Friday, with nominal earnings expected to slow to 2.4% y/y vs. a revised 2.7% (was 3.1%) in February. After yesterday’s dovish hold, the Bank of Japan is still seen on hold through 2025. Looking ahead, the swaps market is pricing in only 25 bp of tightening over the next three years.
Australia’s federal election will be held Saturday. A party needs to win at least 76 seats in the 150 seat House of Representatives to form a majority government. Initial results are expected Saturday around 500 AM ET. The two main parties facing off are the governing center-left Labor Party and the conservative Liberal-National coalition. Prime Minister Albanese’s Labor Party has been in government since the 2022 election with a majority of 77 seats. Polls indicate a tight race, with the possibility of a hung parliament. The final AFR/Freshwater Strategy poll shows Labor leading the Coalition on a two-party preferred basis by 51.5% to 48.5%. This could translate to Labor securing 74 seats and the Coalition 64, making it necessary to form a form a coalition or govern as a minority government. In contrast, the final YouGov's MRP poll shows that Australia will re-elect a Labor majority government, with the most likely result being Labor taking 84 seats and the Coalition 47 seats.
The election outcome is unlikely to drastically reshape the fiscal outlook. The IMF projects a modest fiscal boost to growth in 2025, followed by a drag on growth the subsequent two years. As such, fiscal policy should not derail the RBA’s easing cycle. The market continues to fully price in a 25 bp cut to 3.85% at the May 20 policy meeting. Over the next 12 months, the swaps market is pricing in nearly 125 bp of total easing.
Australia reported soft retail sales data. Nominal retail sales came in a tick lower than at 0.3% m/m in March vs. 0.2% in February. In real terms, Q1 retail sales came in flat q/q vs. 0.3% expected and a revised 0.8% (was 1.0%) in Q4. Going forward, uncertainty about global economic policy settings could lead households to further curtail spending. In turn, this would support continued easing by the RBA.
Singapore holds elections Saturday. The ruling People’s Action Party is widely expected to win, as it has in every election since independence in 1965. However, the election will be a referendum on Prime Minister Wong, who took over the post last year when former Prime Minister Lee stepped down. The PAP won only 61.2% of the vote in the 2020 elections, down nearly 9 percentage points from the previous vote but still good enough to win an overwhelming majority with 83 of the 95 seats in parliament. The opposition Workers’ Party is looking to build on the 10 seats it won last time, which was a record for any opposition party.
